How do trade costs impact trade composition of the export-oriented firms in Pakistan?

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Developed economies have a large manufacturing base, a wide set of exported products, and high survival rate of their exporting firms. One of the main reasons for their exceptional export performance is that these economies have drastically reduced the costs of conducting international business. In developing world, by contrast, the higher trade costs induced by multiple policy and non-policy barriers are still considered a huge impediment in the growth of their exports. In this background, this projects aims to explore the impact of trade costs on the export-oriented firms of Pakistan. It will examine a linkage between the costs of conducting international business and the firms’ decisions to enter into export markets and their choice of exported products.

This study has two main parts. The first part investigates the role of trade costs on the firms’ exporting behaviour. It will examine the influence of trade costs on entry, survival, and exits of these firms. Entrants are the firms which start exporting activity for the first time; they did not export at time ‘t-1’ but entered the export market at time ‘t’. By contrast, the exiters are the one who exported at time ‘t’ but cease exporting at time ‘t+1’, whereas the incumbents are those who continue their exporting business at least for these three time periods (‘t-1’, ‘t’ and ‘t+1’). This work will examine the differential impact of bilateral trade costs on these three categories of exporters.

The second part will investigate the same relationship between trade costs and the choice of export-product mix to various destinations. It will focus on multi-product firms and explore how their choice of certain products is influenced by high trade costs. Both the parts combined will answer the question whether the higher trade costs influence the decision of firms to enter the export market, or their choice of export products, and which effect is more significant in Pakistan’s context. The primary sources of information for exploring these questions are recently released bilateral trade cost dataset and exporter dynamics database of the World Bank. It will, however, source the information from national data sources where required.

Besides contributing to the literature on exporting firms in developing world, this study has direct policy relevance for Pakistan. After the fall in tariff barriers and elimination of quotas under the auspices of international institutions, the focus of trade policy has shifted to reducing other costs impeding growth of trade. In December 2013, the WTO members signed an agreement on trade facilitation (ATF), which primarily aims at reducing these costs. In the wake of implementation of the ATF, this study will generate sensitivity about the issue and help in targeting trade facilitation measures to sensitive markets and products. The results will also shed light on the unexploited potential markets and products.